Shetland Corporation, a C corporation, has E&P of $1,000,000. The corporation stock is held as follows:Matthew 1,000 sharesAaron 1,000 sharesFay 1,000 sharesMarlyebone Partnership 1,000 sharesDevon Corp. 1,000 sharesTotal Shares 5,000 shares Matthew would like to redeem 500 shares of stock. The fair market value of the stock is $200,000. Matthew acquired the stock 10 years ago and has a basis of $200/share in her stock. Note: Since Shetland Corporation is not traded on an exchange, Matthew does not have the option for selling his stock on an open market.Here is additional information about Shetland Corporation:Aaron is Matthew’s first cousinFay is Matthew’s motherMatthew owns 10% of Marlyebone PartnershipMatthew owns 20% of the shares in Devon Corporation Will this redemption of 500 shares of Matthew’s stock be treated as a qualified stock redemption or will it be treated as a distribution? Support your answer with calculations.How much tax must Matthew pay if this transaction is treated as a qualified stock redemption? Matthew is an individual in the 37% tax bracket.How much tax must Matthew pay if this transaction is treated as a distribution (i.e. this transaction is NOT a qualified stock redemption)? (Matthew does not have any additional capital transactions).Matthew is still in the planning stage for this transaction. What would you recommend?

Matthew is shareholder of Shetland Corporation holding 1,000 shares of the company and is going to…

Answered: Will this redemption of 500 shares of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Shetland Corporation, a C corporation, has E&P of $1,000,000. The corporation stock is held as follows:

Matthew 1,000 shares

Aaron 1,000 shares

Fay 1,000 shares

Marlyebone Partnership 1,000 shares

Devon Corp. 1,000 shares

Total Shares 5,000 shares

Matthew would like to redeem 500 shares of stock. The fair market value of the stock is $200,000. Matthew acquired the stock 10 years ago and has a basis of $200/share in her stock. Note: Since Shetland Corporation is not traded on an exchange, Matthew does not have the option for selling his stock on an open market.

Here is additional information about Shetland Corporation:

Aaron is Matthew’s first cousin
Fay is Matthew’s mother
Matthew owns 10% of Marlyebone Partnership
Matthew owns 20% of the shares in Devon Corporation

Will this redemption of 500 shares of Matthew’s stock be treated as a qualified stock redemption or will it be treated as a distribution? Support your answer with calculations.
How much tax must Matthew pay if this transaction is treated as a qualified stock redemption? Matthew is an individual in the 37% tax bracket.
How much tax must Matthew pay if this transaction is treated as a distribution (i.e. this transaction is NOT a qualified stock redemption)? (Matthew does not have any additional capital transactions).
Matthew is still in the planning stage for this transaction. What would you recommend?

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